How Does Bankruptcy & Debt Consolidation Differ?

Bankruptcy is a filing in Federal Court. Debt Consolidation does not take place in any court, rather it is then same negotiation that debtors can perform on their own, but through an intermediary, usually a company or law firm.

Debt Consolidation

Most Debt Consolidation companies or law firms will have those enrolled in their programs contribute a certain amount of money each month to an account. While this money is accumulating, the debts are not paid. Once the debts are not paid for 60 – 90 days, some creditors will negotiate, be this through a settlement offer or an installment plan. Be careful, most Debt Consolidation Companies will not acknowledge this, but many creditors do not take part in their programs or do not offer settlements or installment programs. In theory, once the saving account that the enrolled person pays into every month reaches a certain amount, the consolidation company will then begin paying out the settlements that they have been able to obtain.

The problem with this approach is demonstrated by the following: If you have 10 credit cards and 2 of them do not take part in these programs, but 8 do, you could be worse off than before you started. The 2 remaining cards have not been paid for some time by this point (your credit is completely destroyed usually from this) and as a result their penalties and interest may well have put the 2 remaining cards’ balances above that of the original 10 cards. If your debt consolidation company cannot tell you up front that they can negotiate all of your debts, then find another company. If they tell you that they can negotiate all of your debts, then double check their work. I have had many clients who were once told this only to find out that they were told whatever they needed to be told to get them enrolled, only to find out later that their creditors have never take part in any type of debt consolidation program.


Bankruptcy differs depending on the Chapter you file, but for this section we will discuss a Chapter 7 as it is the most common chapter to be filed. In a Chapter 7 bankruptcy, your attorney will tell you up front if you have any debts that are not capable of discharge. Most all debts are capable of discharge. The most notable ones that are not dischargeable are Taxes, in some instances, Government Debt (you cannot get rid of your parking tickets), Student Loans, and Child Support. Once your Chapter 7 bankruptcy is filed, there are no negotiations. If your debts are capable of discharge then they are simply discharged – no pay back.

Many people want to pick and choose which debts they will discharge (wanting to pay some.) You simply cannot do this and for a very good reason. Bankruptcy law is founded on equality – every debtor will be treated equally and in kind. Also, it acknowledges that debt, especially these days, is like cancer. To solve the problem, you must remove it all. With modern collections’ aggressive tactics, penalties and interest rates, any debt that would be allowed to survive, would be very capable of landing the Debtor back in their same debt dilemma in a relatively short amount of time. The courts are interested in putting you back on your feet, towards a permanent solution, not providing a brief reprieve.


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